Considering the robust global M&A markets of the last few years, it is unsurprising that activist investors have increasingly sought to leverage these transactions for their own gain. To that end, shareholder activists have developed a variety of M&A-related strategies. Most commonly, they either seek to catalyze transactions by pressuring companies into a merger or acquisition, or to scupper deals that would otherwise have gone ahead. Another commonly-used strategy involves agitating for better deal terms. Often referred to as ‘bumpitrage’, the activist investor purchases shares in a company that is subject to a takeover bid, and then rallies other shareholders around the idea that the current bid is insufficient and ought to be renegotiated. In many cases, the mere threat of obstructing shareholder approval is sufficient to motivate a target board to renegotiate the equity terms of the deal.
The rewards of a successful bumpitrage campaign can be significant: research conducted by Activist Insight reveals that between 2013 and 2017, 18 successful campaigns led to an average increase in consideration of approximately 21%. Yet this approach is not without risk. In the majority of cases, bumpitrage campaigns did not meaningfully improve the initial deal terms offered. Occasionally, these campaigns even resulted in worse deal terms.
Advocates of the strategy claim that in the right circumstances, bumpitrage protects shareholders of target companies by ensuring that bidders pay a fair price for their acquisitions. Proponents also claim that successful campaigns may result in target boards negotiating their initial deal terms more aggressively. Conversely, detractors warn that on a systemic level, the practice is likely to have a chilling effect on M&A, as bidders face additional risk when approaching targets.
Regardless of its circumstantial or systemic merits, the number of bumpitrage campaigns will likely increase in the future. In Canada, a strong M&A environment coupled with changes to Canadian takeover bid rules (available here) have created favourable conditions for this strategy. The minimum bid periods set out in NI 62-104 mean that opportunistic shareholders benefit from minimum periods of time during which they can try to convince fellow shareholders of their story. Moreover, in recent years the Canadian market has drawn increased attention from sophisticated US activists who are often better positioned to identify M&A opportunities.
Canadian boards therefore need to understand and plan for both M&A-related activism generally and bumpitrage specifically. Fortunately, company boards can look to a number of tried-and-true defence strategies developed in the context of M&A activism (some of which are outlined here). What underlies these various strategies is the need to sell existing shareholders on the board’s larger vision before, during, and after the announcement of a transaction. When a board facilitates frequent and open discussion with existing shareholders, and is responsive to any concerns raised, activist investors will face an uphill struggle in holding up transactions.
The author would like to thank Felix Moser-Boehm, articling student, for his assistance in preparing this legal update.